Bitcoin, the largest cryptocurrency by market capitalization, is a risky investment with high volatility. It should only be considered if you have a high-risk tolerance, are in a strong financial position, and can afford to lose any money you invest in it.
If you choose to invest, it is important to maintain a diversified portfolio that includes several different types of investments to reduce your exposure to risk overall. Generally, do not invest more than 10% of your portfolio in risky assets such as Bitcoin.
Positives
- Bitcoin has historically offered the potential for high returns.
- It is decentralized. However, many people choose to trade and store Bitcoin on centralized platforms.
Negatives
- Bitcoin price could go down. Many. In 2022, it’s down more than 75% from its all-time high. Unlike traditional financial exchanges, cryptocurrency exchanges do not have circuit breakers, which automatically stop trading when prices drop too quickly. Cryptocurrency markets also trade 24/7, and dramatic declines can occur at any time.
- Transactions are irreversible. People have lost millions of dollars in Bitcoin because they have lost or forgotten their wallet credentials.
- The multiple crypto platforms where you can buy or sell Bitcoin and other coins have collapsed, leaving users with the bag. Recently, FTX and FTX exchanges. The United States has filed for Chapter 11 bankruptcy.
- Cryptocurrency exchanges lack basic consumer protections, such as insurance protection from the Securities Investors Protection Corporation and the Federal Deposit Insurance Corporation, found in traditional financial products.
What type of investment in bitcoin?
- More than a decade later, there is still debate about the type of bitcoin investment. Owning Bitcoin is not the same as owning stock in a company. Unlike a business, Bitcoin does not generate revenue by selling products or services. Do not issue a dividend. Nor does it have a CEO, board of directors, or other central groups that set goals or can be held accountable.
- In June 2022, SEC Chairman Gary Gensler said on CNBC that some cryptocurrencies “have the key features of a security” while others, specifically Bitcoin, are a “commodity. ”
- Commodities are associated with raw materials such as minerals, grains, and milk. Commodity markets are regulated by the Commodity Futures Trading Commission, which also regulates forex trading and is the government agency most active in regulating cryptocurrencies.
- Others say it’s a currency – something you can use to pay for goods and services. While there are companies that accept Bitcoin, it is far from a widespread practice.
Bitcoin and Volatility
Bitcoin’s explosive growth and its ability to maintain its title of the most valuable cryptocurrency can hide the fact that its rise has not been linear.
The upside of buying bitcoin for a dime in 2010 is obvious. But with volatility come big downsides as well. Someone who bought bitcoin in 2013 would have seen their investment drop by 80% – and not be above water for another three years. The decline in 2018 lasted about a year, and there were drops of 50% or more in 2021 and again in 2022.
Anyone who invests in Bitcoin will hope for the best, but they should be prepared for a significant downturn as well. Although Bitcoin has recovered many times, there is also the possibility that it will go to zero – for example, if several crypto platforms fail and there is a massive sell-off.
